Mining Deals Performance Improvement Corner - Cascading KPIs Junior Mine - TSX Ventures Papua New Guinea 2008: A renaissance year for the Indonesian mining sector? Mining Industry Global Mine* Bulletin Having just completed a second visit to China in the last month, I can state that demand for commodities does not seem to be slowing. The mining industry remains in great shape, although it is fair to say that smaller miners are probably finding it tougher to raise debt and equity than would have been the case twelve months ago. This aside, all systems are go. The start of consolidation amongst the major miners has been the most talked about item. BHP Billiton formalised a takeover bid for Rio Tinto; however, it has many regulatory hurdles to negotiate before it will really be “live”. Already the acquisition of a 9% stake in Rio by Chinalco and Alcoa highlights that there will probably be many twists and turns in this potentially industry-transforming transaction. The other big potential deal was going to be between Vale and Xstrata, however, this seems to be dead, at least for the moment. These events provided a perfect backdrop for the release of our inaugural Mining Deals publication. This document, which is the subject of the first story in this newsletter, examines the deals announced and completed in 2007 and compares them to 2006 and 2005. It will be no surprise that 2007 saw a record number of deals and a record value for deals. Indeed we also saw the largest ever transaction when Rio Tinto bought Alcan. The outlook for 2008 is even brighter, and there is every reason to believe that the records set in 2007 will be surpassed. In the Performance Improvement corner, we examine Cascading KPIs and, in particular, how they can assist in pinpointing assets that are not performing to expectations. We recently released our TSX Ventures Junior Mine* report which outlines the performance of companies listed on that exchange. An outline of that publication is set out below. It is the second of our 2008 junior mine series, following the AIM report we released earlier in the year. The trilogy will be complete in the next month with the release of Aussie Mine*. We are also in the process of preparing Mine* which looks at the performance of the Global Top 40 miners. More will be said on these two publications in the next Global Mine* Bulletin. Finally in our geographic spotlight, we look at how events are unfolding in Indonesia and Papua New Guinea. Both locations have seen little investment in exploration over the last decade, but are changing rapidly. I trust you find this newsletter of interest. We welcome any feedback on this issue or thoughts for future items to be covered. Tim Goldsmith Global Mining Leader PricewaterhouseCoopers May 2008 *connectedthinking
Transcript
Mining Deals
Performance Improvement Corner - Cascading KPIs
Junior Mine - TSX Ventures
Papua New Guinea
2008: A renaissance year for the Indonesian mining sector?
Mining Industry
Global Mine* BulletinHaving just completed a second visit to China in the last month, I can state that demand for commodities does not seem to be slowing. The mining industry remains in great shape, although it is fair to say that smaller miners are probably finding it tougher to raise debt and equity than would have been the case twelve months ago. This aside, all systems are go.
The start of consolidation amongst the major miners has been the most talked about item. BHP Billiton formalised a takeover bid for Rio Tinto; however, it has many regulatory hurdles to negotiate before it will really be “live”. Already the acquisition of a 9% stake in Rio by Chinalco and Alcoa highlights that there will probably be many twists and turns in this potentially industry-transforming transaction. The other big potential deal was going to be between Vale and Xstrata, however, this seems to be dead, at least for the moment.
These events provided a perfect backdrop for the release of our inaugural Mining Deals publication. This document, which is the subject of the first story in this newsletter, examines the deals announced and completed in 2007 and compares them to 2006 and 2005. It will be no surprise that 2007 saw a record number of deals and a record value for deals. Indeed we also saw the largest ever transaction when Rio Tinto bought Alcan. The outlook for 2008 is even brighter, and there is every reason to believe that the records set in 2007 will be surpassed.
In the Performance Improvement corner, we examine Cascading KPIs and, in particular, how they can assist in pinpointing assets that are not performing to expectations.
We recently released our TSX Ventures Junior Mine* report which outlines the performance of companies listed on that exchange. An outline of that publication is set out below. It is the second of our 2008 junior mine series, following the AIM report we released earlier in the year. The trilogy will be complete in the next month with the release of Aussie Mine*. We are also in the process of preparing Mine* which looks at the performance of the Global Top 40 miners. More will be said on these two publications in the next Global Mine* Bulletin.
Finally in our geographic spotlight, we look at how events are unfolding in Indonesia and Papua New Guinea. Both locations have seen little investment in exploration over the last decade, but are changing rapidly.
I trust you find this newsletter of interest. We welcome any feedback on this issue or thoughts for future items to be covered.
Tim Goldsmith Global Mining Leader PricewaterhouseCoopers
May 2008
*connectedthinking
May 2008 PricewaterhouseCoopers. All rights reserved. Global Mine* Bulletin | 2
By any measure, 2007 was a record
year and also included the largest ever mining transaction -- Rio Tinto’s purchase of Alcan. The number of deals was 59% higher than the prior year, and transaction value also rose by 18%. Deal numbers have doubled in the two-year period since December 2005, and deals exceeding US$1 billion have more than trebled from eight to 25.
An interesting finding was the increase in transactions by Chinese and Russian companies. In 2005 the total value of deals was US$5.3 billion, whilst in 2007 it exceeded US$32 billion.
Consolidation seems set to continue and “eat or be eaten” is the new reality. Indeed, after the initial shockwaves of the subprime crisis were felt, the deal level in the mining sector rose.
The outlook for 2008 looks just as rosy. The mega deals are continuing with the BHP Billiton bid for Rio Tinto breaking all previous records. Numerous other deals have also been announced and the credit crunch contagion can be seen as something that is driving deals rather than curtailing them.
Copies of the Mining Deals publication can be downloaded from www.pwc.com/mining. For further information on this publication contact Tim Goldsmith. - [email protected]
Mining DealsOur recently released publication Mining Deals considers all announced and completed transactions in the mining sector for the year ended 31 December 2007, and compares and contrasts the 2007 results against the years ended 31 December 2005 and 2006.
Cascading KPIs
KPIs rarely link financial and non-financial drivers. This means that it is difficult to understand the real drivers of financial performance and their impact on profitability. Complex and mature continuous process assets are typically driving for 2-5% improvements in production and cost performance each year. Achievement of these gains is dependent on tight operational control at detailed technical levels. Linking these technical drivers to asset profit/return in a way that works for operations staff & engineers is critical to this goal. PwC/GEM’s Cascading KPI approach links asset profit rigorously to detailed technical performance drivers, enabling better understanding of performance variances and an improvement in the ability of the organisation to react appropriately.
The model focuses on both the volume (revenue) and cost drivers and enables all levels of management to better focus on production from volume and cost perspectives, with an emphasis on understanding variance in performance from plan, and the underlying reasons for these deviations to enable appropriate and prioritised corrective actions to be taken.
This Cascading KPI approach combines the delivery of a performance variance reporting and analysis tool, along with the integration of its uses into the existing performance management systems of the organisation.
The approach has been successfully deployed in a number of the world’s largest asset intensive businesses, including alumina refining, aluminium smelting, nickel mining, smelting & refining; and copper mining, concentrating and electrowinning. It has been used for other purposes in mineral sands and iron ore mining operations.
Organisations that adopt the approach typically have a need to better understand the reasons underlying variances in performance from plan so that appropriate corrective actions can be taken. This is achieved by using a driver tree model that starts with enterprise value as the primary measure and disaggregates this into EBIT (revenue/ volume and cost) and capital charge trees; for operational purposes most interest is usually in the EBIT tree. These trees are disaggregated in multiple levels (at times >10) and typically go far beyond financial measures into physical drivers of performance
Performance Improvement corner
May 2008 PricewaterhouseCoopers. All rights reserved. Global Mine* Bulletin | 3
This is the second year for the Canadian publication of junior mine* - Review of
trends in the TSX-V mining industry. This publication examines the top 100 mining companies on the TSX Venture Exchange (TSX-V) based on market capitalisation as at 30 June 2007 and also compares the trends and statistics from the 2006 report.
Overall the mining sector continued to play a dominant role on the TSX-V, with nearly 1,000 mining companies accounting for 47% of all companies listed. The market cap for the top 100 mining companies increased from C$14.8 billion in 2006 to C$20.2 billion in 2007. Over 80 of the companies surveyed were in the exploration and development phase.
In 2007, there was record capital raising of approximately C$3.0 billion (2006 - C$1.7 billion) and
record spending on exploration, mine development and production of approximately C$1.4 billion.
If commodity prices remain high, prospects remain good for another strong year to come, although following the recent subprime crisis, companies may find raising capital more difficult in 2008 than 2007.
Copies of the junior mine* publication can be downloaded from www.pwc.com/mining. For further information on this publication contact Paul Murphy. - [email protected]
Junior Mine*Review of trends in the TSX-Ventures mining industry
such as distances, flows, availability, utilisation and temperatures (each element in the tree is called a node and any node can be a KPI; very large models can have node counts in the thousands).
Variances in physical measures can be quantified in terms of their impact on the EBIT performance of the entity for that month, e.g., a 0.5 degree temperature variation in a furnace may have a $500,000 EBIT impact. The ability of the model to filter KPIs or nodes in the trees on their EBIT impact is a key component of its value. Once the variances from plan have been identified the driver trees are used to analyse the detailed reasons underlying the variances. This is achieved through graphical and traditional reporting present in the
tool, as well as the ability to drill down the driver trees to identify critical KPIs impacting on performance. The tool also enables longer term trends to be analysed. Many of the organisations using the approach refresh the model monthly and it is used in their monthly performance management system.
The tool can also find application in improvement planning by enabling a better understanding of the impact of a specific improvement program on a KPI and therefore its potential impact on EBIT. Several organisations use the tool for budgeting, enabling the next years budget to be compared across all KPIs against the previous years actuals or budget.
In summary, the Cascading KPI approach (tool and process) is:
• Value add to financial & production reporting
– improves focus on major performance drivers
– links technical issues to EBIT impact
– explains variances– allows prioritisation of
corrective action.
• Extendable - starts with monthly variances but can be used in other areas of asset management.
• Flexible - has applications for senior & middle management and front line staff.
For more information on Cascading KPIs contact Robert Radley - [email protected]
Today, off the back of improved commodity prices and a more stable government that has worked with industry to encourage exploration, the outlook is bright. Tax incentives and a regulatory environment conducive to development have enabled projects such as Hidden Valley, Simberi Island, Ramu and Yandera to move forward.
The PwC team in PNG has assisted many companies gain the first mover advantage, and there is an increasing opportunity for all companies as the country regains its place in the global mining community. After all, mining is an industry that has always accounted for a large proportion of the nation’s exports, GDP and government revenue. Once again it is open for business.
Papua New GuineaPapua New Guinea (PNG) is elephant country. Over the last 25 years, successful operations have been conducted at mines such as Ok Tedi, Porgera, Misima and Lihir. However political instability and the challenges of a diverse nation, weather and an “it’s all too hard” attitude moved PNG to the bottom of the league table of places to invest. This is changing rapidly.
May 2008 PricewaterhouseCoopers. All rights reserved. Global Mine* Bulletin | 4
PwC recently released
its ninth annual survey of the Indonesian mining sector, mineIndonesia 2007* - review of trends in the Indonesian mining industry. The report highlights that the mining industry in Indonesia continued to reap the benefits of high commodity prices, exhibiting strong growth in revenues and profits. PwC’s survey of more than 70 companies, representing more than 85% of the Indonesian mining industry, shows that aggregate profits achieved by the industry reached record levels, resulting in the highest level of government revenues from royalties and taxes in the last 10 years.
The report notes that while the Indonesian mining industry continues to post strong financial results on the back of high minerals prices and continuing global demand, more new investment is needed to sustain it into the long term. Recent years have seen some growth in investment spending in Indonesia, but exploration spending on new projects is still low considering the country’s geological attractiveness.
Recently there appears to be an increased appetite to take advantage of Indonesia’s well recognised geological potential in this high price environment. Much of this activity has been in the coal sector, where Indonesia is the leading exporter of thermal coal. Investors from India and China have been particularly active in seeking new investments with Tata Power’s US$1.1 billion acquisition of a 30% interest in the country’s largest coal producer leading the way. Indonesia’s own programme to add 10,000 MW of coal-fired power over the next few years will also drive the need for more investment in the coal sector. Ongoing contract negotiations for multi-billion dollar investments in the nickel sector from global players such as Rio Tinto and BHP Billiton are also positive signs.
The PwC report shows that survey respondents still see some significant impediments to increased investment in the Indonesian mining sector. The Top 5 issues highlighted were:
• Conflict between mining and forestry regulations
• Duplication and contradictions between central and regional government regulations
• Taxation issues (including VAT on coal and gold; and the need for tax incentives)
• Delay in finalisation of the new mining law
• Lack of fairness in divestment of foreign mining interests and mine closures.
The slow pace of finalising the new mining law is of particular concern. Due to the significant changes to the regulatory environment proposed in the current draft of the law, investors appear to be reluctant to commit significant funds to new projects, until the landscape is more certain.
Finalisation of an investor friendly mining law may just be the impetus that is needed for Indonesia to really reap the benefits of the current mining boom and to make 2008 a renaissance year for the Indonesian industry.
2008: A renaissance year for the Indonesian mining sector?2008 is seeing a resurgence in investment in the Indonesian mining sector after a number of years of lacklustre growth, due to well-publicised regulatory and other issues.
A copy of mineIndonesia 2007* can be downloaded from www.pwc.com/id. For further information on Indonesia contact Sacha Winzenried. - [email protected]
